From 6 April, those aged 55 or over are able to cash in their defined contribution pension savings and do with it as they see fit, rather than being forced – in most cases – to buy a lifetime income via an annuity with at least 75% of the fund.
When the new policy was announced in early 2014, Pensions Minister Steve Webb made a now-infamous comment that, as an example of what they could do, pensioners would be free to splash out on a Lamborghini with their pension pots if they wished.
‘Lamborghini pensions’ has now become a bit of a shorthand for the policy – searching ‘Steve Webb Lamborghini’ brings up 267,000 results – but how realistic is it that pensioners will be heading to their nearest dealer’s forecourt?
The £100,000 question
Research from accountants Deloitte shows a clear majority (59%) of savers want a guaranteed income in retirement, with just 42% wanting access to lump sums, while according to Government figures, the average pension pot size at retirement is £25,000. On this basis, it’s probably unlikely that the Italian sports car industry will see a sudden surge in demand, but anyone looking to buy some new wheels should bear in mind the tax implications.
We went on second-hand car site autotrader.com and the cheapest Lamborghini we could find was a white Gallardo Spyder 2 Door, 06 reg, with around 10,200 miles on the clock, for a shade under £85,000. It looked like a nice little runner.
To buy this with your pension pot, including paying a quarter of the car’s ticket price with your tax free lump sum – £21,250 – leaving a few grand left over for petrol, tax, insurance and servicing (keeping such a car on the road is pretty expensive) and paying the resulting income tax bill on what you take out, would mean cashing in a pension pot of about £100,000. On this, you’d expect to pay an eye-watering £22,043 in tax.
If you’d already taken your 25% tax free lump sum and still wanted to buy it, you would need about £130,000 on hand and be prepared to pay a tax bill of over £47,000.
Think about tax
Anyone thinking about such an extravagant purchase should therefore bear in mind that the taxman will be rubbing his hands with glee at the prospect. In fact, the Government’s own projections on the pensions freedoms show that it expects to raise more than £3.7 billion in extra tax between now and 2019-20.
This is because the Government expects retirees to take out enough money to incur income tax bills. Most people don’t pay tax on the first £10,600 they earn – called the Personal Allowance – but depending on how much you take out over the year as income, you will be eligible to pay tax.
Aside from any money you take as your tax-free lump sum, if your total income including the State Pension is above the Personal Allowance threshold and up to £31,785, you will pay the Basic rate of income tax, currently 20%.
For amounts over £31,786 but under £150,000, you will usually pay Higher rate of 40%, and amounts over £150,000 will be taxed at 45%. (Tax bands quoted are for the 2015-16 tax year.) For amounts over £100,000, you will start to lose your personal allowance also.
How will pension freedoms affect you? What plans do you have? Have you considered the tax implications for any of your plans? Let us know in the comments below.
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